Chillin'Competition

Relaxing whilst doing Competition Law is not an Oxymoron

Drawing Inferences from S&D Law

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Many thanks for your answers. Some readers got it right, others not. To be fair, the question was poorly formulated, and many alternative explanations could apply.

Scott Summer from the Money Illusion provides the answer, and comes back on the question:

I teach at an institution that is well above average, and here is what I have found.  Almost every single student comes into EC101 knowing the impact of supply and demand shocks.  Tell them a frost hits the Florida orange crop, and they can explain what happens to the price of oranges.  Tell them millions of Chinese start buying cars and they can tell you what happens to the price of oil.
I also find that almost no student comes into my class knowing how to interpret price and quantity data.  And what is worse, they leave the course equally ignorant.  I often ask the following question to upper level econ or MBA students who have already taken principles:
Question: A survey shows that on average 100 people go to the movies when the price is $6 and 300 people go when the price is $9.  Does this violate the laws of supply and demand?
Very, very few can answer this question, especially if you ask for an explanation.  Even worse, I think there is a perception that there is something ‘tricky’ about this question, something unfair.  In fact, it is as easy a question as you could imagine.  It’s basic S&D.  It’s merely asking students what happens when the demand for movies shifts.  I cannot imagine a less tricky question, or a more straightforward application of the laws of supply and demand.  In the evening hours the demand for movies shifts right.  Price rises.  Quantity supplied responds.  What’s so hard about that?  And yet almost no student can get it right.  Our students enter EC101 knowing one of the two things they need to know about S&D, and they leave knowing one of the two things they need to know about S&D.  Maybe instead of having them memorize mind-numbing lists of “5 factors that shift supply,” and “5 factors that shift demand,” we should just tell them to read something that will explain what economics is all about, something that portrays economists as detectives trying to solve the identification problem, something like Freakonomics.

(Image possibly subject to copyrights: source here)

Written by Nicolas Petit

1 March 2010 at 11:02 am

Posted in Uncategorized

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